How is the Lyft IPO filing impacted by driving costs?
Last Friday, Lyft filed its IPO registration, revealing information about the financial health of the organization. This includes the company’s net loss of $911.3 million last year, against revenues of $2.2 billion.
As is typical of such filings, the Lyft IPO registration lays out a number of risk factors that might impact their business. This includes a warning that they “have a history of net losses and … may not be able to achieve or maintain profitability in the future” as the second bullet of an 18-point list. Buried further down the list, is a statement that “If the contractor classification of drivers that use [Lyft’s] platform is challenged, there may be adverse business, financial, tax, legal and other consequences.”
Employee vs Contractor
The distinction between “employee” and “contractor” can immensely impact the profitability of a company. Nearly a year ago today, the Massachusetts Institute of Technology published a research brief that found that rideshare drivers make a median profit of $3.37 per hour before taxes. They also found that 74% of drivers earned less than minimum wage in their state.
Trouble with Labor Code Violation
Two years previously, Uber drivers were offered a $100 million settlement from Uber to settle a class action lawsuit which would have turned on how drivers were classified. If classified as employees, the drivers would be subject to a number of protections, including a guaranteed minimum wage and other benefits. In California (where the lawsuit was filed) labor code 2802 requires that “An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” This also specifically requires reimbursement of “all reasonable costs” incurred as part of doing their job.
Illinois recently passed a similar law – which has set a number of employers of low-wage drivers scrambling to determine several things. What part of an employee’s paycheck is their hourly wage? What part reimburses for the vehicle, gas, maintenance, and other expenses incurred as a requirement of job performance?
Standard Wage Solution?
Rather than trying to determine whether rideshare drivers should get be categorized as employees entitled to these protections or contractors who aren’t, New York City just went ahead and mandated that rideshare drivers in the city should receive a wage floor of $17.22 per hour after expenses – or $26.51 per hour before expenses.
Of course, figuring out what constitutes an expense can be tricky. Clearly, the gas consumed as part of the drive is easy to measure. But what about the cost of the oil change? What about tire replacements that the driver will need to incur after 3,000 miles of Lyft driving? Putting miles on your personal car depreciates its value. The more a Lyft driver drives, the faster they lose value in their vehicle. And before they even hit the road, they must pay tax, title, registration, and insurance fees.
How do delivery services handle reimbursement?
Historically, some companies who employ delivery drivers have assigned an arbitrary “$X.XX per pizza delivered” fee they pay their drivers, which has not held up in court as a way to reimburse these costs.
Others have used the IRS “Safe Harbor Rate” to pay their employees a cent-per-mile driven to calculate these costs. But this rate isn’t meant to be a reimbursement calculation. Take it from an employee of the company who consults with the IRS to set the yearly rate. The rate is simply intended as the maximum amount the government will let you give your employees tax-free for driving. Additionally – because the price of gas varies in different cities across the year – employees under this model may still be under-paid (or over-paid) for the driving they do (which also happens depending on the amount they drive during the year).
Mileage Reimbursement Solution
The IRS does provide a better way to calculate a drivers’ true costs: the Fixed and Variable Rate (FAVR) plan. For many employers, it’s both the most fair way to reimburse driving employees and the most inexpensive vehicle program.
However, if Lyft continues to classify their drivers as contractors, I suspect that they won’t provide drivers a FAVR reimbursement. Or any other reimbursement for that matter. Which – as the Lyft IPO filing points out – may prove to be a risky and costly strategy indeed. Learn more about the consequences of under-reimbursing mobile workers here: